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What is a creditworthiness assessment?

The important question behind the somewhat unwieldy term “creditworthiness assessment” is: Can a consumer afford a specific loan – or not? Finding the answer to this question in a fair and sound manner is the key element of what we call responsible lending.

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Here’s the basic idea: Providers should only grant a loan if they consider it at least likely that the borrower will be able to meet the contractual conditions (hence, to pay all fees and make all repayments at the specified points in time). In doing so, providers should rely exclusively on financially relevant information. This includes for instance income, other loans taken out or the purpose of the loan. Exactly which information is relevant and how the assessment should be performed may depend on the specifics of the loan. In any case, however, all non-financial data, such as social media data, should not be allowed to play a role in the assessment.

Where creditworthiness assessments are done in a completely automated fashion, consumers have to be notified about this. Moreover, consumers should always have the right to a human reassessment where credit has been refused by a computer.

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What’s important: Creditworthiness not only depends on the consumer but also on the concrete credit proposals and its conditions! A creditworthiness assessment therefore always needs to look at both the potential borrower and the offered credit product, and ask: Is that credit offer adequate for the consumer? As an example, student loans can be designed specifically in a way that makes it likely that contractual repayments will be met. Obviously: A simple loan with mandatory repayment of the whole amount after a fixed period of three years will be inadequate for most students. Instead, tailor-made student loans have features such as no repayments before the end of the studies, repayment sizes linked to future income and potentially some form of public guarantee. In this way, mandatory creditworthiness assessments also force providers to think about the adequacy of their products for consumers.